Definitions [4]
"Fixed costs are costs which do not change with change in the quantity of output." — Anatol Murad
"Variable cost is that part of total cost which varies directly with output." — McConnell
"Total cost of production is the sum of all expenditure incurred in producing a given volume of output." — Dooley
Define Direct Cost.
Material, labour and other expenses which are directly or easily traceable to a product, service or job are known as direct costs. In the production of an article, materials are purchased, wages are paid to workers and certain other expenses are incurred directly. All these take an active and direct part in the manufacture of a product and are, therefore, called direct costs.
Formulae [1]
TC = FC + VC
(TC = Total Cost, FC = Fixed Cost, VC = Variable Cost)
Key Points
- Fixed costs remain constant at any output level.
- Variable costs change as output changes.
- Total cost equals the sum of fixed and variable costs.
- Average fixed cost (AFC) drops as output increases because FC is spread over more units.
